Synopsis – “The Wine Shortage vs. Wine Surplus” Debates

The wine industry’s been abuzz with counter-arguments to last month’s Morgan Stanley report on pending wine shortages. In summarizing the opposing views for the speech I gave on Friday (Global Wine Supply – Surplus or Shortage?) it seems fair to summarize the arguments as follows:

Morgan Stanley focuses on several long-term trends which indicate a shortage with little near-term relief possible

Rapidly expanding demand in China

Moderately expanding demand in U.S.

Reduced area under vine, globally

Depleted stocks, worldwide

Opponents point out the potential bias of the report

Morgan Stanley benefits from a rush to purchase, as they have the struggling Treasury Wine Estates on their “buy” list

Treasury just wrote off tens of millions of dollars (USD) worth of wine, dumped due to inability to sell it prior to spoilage date

Other analyst groups calling for Treasury to sell its primary US holding – Beringer Brothers

Were Treasury to sell Beringer, it would benefit from a perceived shortage

“We’ve seen this cycle before” – An artificial shortage was predicted in the 1990’s, resulting in a flurry of purchases, an over-supply, and a crash.

Most of the reduction in area under vines was in France and Italy, where consumption is decreasing due to EU regulations on alcoholic beverages

China’s growth in demand was dealt a blow by recent laws that regulate gifting. This will impact the higher end.

If China is to continue the rising demand for low-end wines, they will have to continue economic growth at the same rate as seen for the past decade. China’s growth has been slowing as of late, and there are concerns about a real estate bubble.

So it seems Morgan Stanley may have a conflict of interest, and the vocal “anti-shortage” writers have the upper hand.

But the Morgan Stanley report is also based on some valid long-term trends. For example, I’ve seen no accounting for the impact of rising water prices on vineyards. And globally, water is becoming a commodity over which battle will be done. It seems clear that agriculture won’t be getting the same cheap water that justified the cost of many water-intensive crops. For example, recent press covered growers in California’s Central Valley pulling out substantial vineyard acreage for this very reason, and the Central Valley is one of the state’s primary sources of inexpensive wine grapes destined for wines under $11 (73% of the market – See WSJ graphic from IRI data, right.)

So, over the long term, and perhaps not in time for Treasury to sell Beringer for a premium, it seems the Morgan Stanley report might prove to be wise investment advice. But as with most things these days, much depends on China.

Published by Dave the Wine Merchant

I've followed my passion for wine to the four corners of the world in endless pursuit of more wine knowledge and experiences. There are few things in life more enjoyable than experiencing a new culture through its wine and food.
Leveraging these experiences, I curate a small portfolio of constantly evolving producers. Like an art gallery's collection, my portfolio consists of hand-crafted wines from artisanal producers that I have personally selected. My goal is to discover boutique wines that taste like they cost more than they do.
Come discover your next favorite! www.DaveTheWineMerchant.com
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